In-depth analysis on Credit Writedowns Pro.

Chance of going over the fiscal cliff is now at least 75%

According to Stan Collender, the chance that the US goes over the fiscal cliff is now at least 75%. This rhymes with what I have been saying all along. I would put the number at 90%. The US will NOT get all of the line items to prevent the fiscal cliff approved. Some will definitely lapse and they will not be offset by any kind of tax cut or spending increase. Austerity is coming. Politically, it is miraculous that the US has resisted austerity for so long given the size of the deficit and the austerity that has already occurred in Europe. I am not making a statement in support of austerity, just addressing the political realities.

[private_gold]

Here’s what Collender writes:

With 17 days as the crow flies before it happens, it’s time for me to do something I’ve been resisting for a week or so: formally increase my odds that we’ll go over rather than avoid the fiscal cliff.

Back in September I said it was better than 50-50 that no deal would be in place by January 1. I raised that to 60 percent immediately after the election. Today, I’m raising my predicted likelihood of no deal before January 1 to 75 percent, and I may still be overstating the possibility that an agreement will be reached and put in place before the tax cuts and spending increases go into effect.

I really hope I’m wrong, and will gladly and publicly say that if a last-minute deal materializes.

Although the Republicans are going to get blamed for the negative effects of the cliff, rhetorically they have backed themselves into a corner. As I wrote after the election, “it makes sense for the Republican party in the US to push the deficit issue because it resonates with much of the voting public and their own voter base.” And the Republicans are playing to their base here.

Having already staked out a position against tax increases and in favour of limits to spending, it’s going to be extremely hard for the Republicans to get a deal through that sees a large deficit which results from spending increases or austerity that results from tax increases. These paths are blocked on the right. This narrows the number of deals that can be made. What’s more is the Democrats’ base is now vociferously against cuts to Medicare or Social Security and so that path is blocked on the left. 

Collender is right. The fiscal cliff will happen – at least in part. Austerity is coming to America. And it will be negative for growth.

Source: Capital Gains and Games

[/private_gold]

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.